Most companies with a listing on Euronext Amsterdam take the form of a Dutch public limited liability company (‘Naamloze Venootschap’ or ‘NV’). The NV can also be used by companies with a stock exchange listing outside the Netherlands. On this page I will describe the main rights of shareholders and powers of the General Meeting of Shareholders (AGM) in special situations.
Protection of shareholders in special situations
The interests of shareholders are particularly at stake if special situations occur in or around the NV which may directly or indirectly have a major impact on the legal position of the shareholders and/or the value of their shares. Most common are a public bid on its shares, restructuring in the face of financial problems, shareholder activism and claims for damages against the NV and/or its directors, banks or accountants.
Around a public bid there are often conflicts. E.g. because the NV supports the bid while many shareholders consider the bid price too low. Or vice versa: the NV opposes the bid while many shareholders find the bid price interesting. A combination of these positions can occur in a bidding war between multiple bidders if the NV has a preference for one bidder over another bidder who offers a higer bid price.
Public bidding rules
Public bids are subject to strict rules. The most important are in the Dutch Financial Supervision Act, the Public Bidding Resolution, the EU Market Abuse Regulation (Financial Supervision) and in book 2 of the Dutch Civil Code. Mandatory parts of the bidding process include the announcement of the public bid, the so-called 4-week notice, the ‘certainty of funds’ statement, the offering document to be approved by the Dutch financial regulator AFM (Financial Markets Authority), the position paper of the NV (does it support the bid or not) and the informative Extraordinary General Meeting (EGM) of the NV to discuss the bid.
The NV opposes the bid
In the case of an unwanted offer, the NV will often (threaten to) use protection measures. The most common protection measure is the issuance of preference shares to a foundation which thus acquires half of all voting rights in the AGM so that a bidder can no longer gain control in the AGM. In the future, the board of the NV will also be able to call on a statutory cooling-off period of up to 250 days during which the AGM cannot take decisions to appoint or resign directors or supervisory directors or to amend statutory provisions relating thereto. Currently the Dutch Corporate Governance Code provides for a response time of up to 180 days during which the board does not have to put such a proposal on the agenda of the AGM.
The NV supports the bid
If the NV supports the bid, it will often cooperate with the bidder by having the bidders nominees appointed to the board of directors or supervisory directors and/or by proposing to amend the articles of the NV in such a way that the bidder will be able to enforce such appointments himself after acquiring a common majority of the shares, thus abolishing any restrictive statutory provisions such as a binding nomination and/or strengthened majority and quorum requirements for appointment and dismissal.
In a bidding war, the NV may have a preference for the bid of a particular bidder and oppose the bid(s) of the other bidder(s). In essence, this is a combination of a friendly bid and one or more hostile bids. The NV may then favour the bidder of its preference by giving it earlier or more access to the company’s books and records or by (threatening) to use of protective measures against the bidder unwanted by the board. This would hamper a level playing field between the bidders which is not in the interest of the shareholders.
Legal options in case of a public bid
Shareholders have various legal options to protect their interests in the face of a public bid. The most important is to submit a request to the Enterprise Chamber (‘Ondernemingskamer’) for provisional measures such as the appointment of one or more independent supervisory directors to oversee the bidding process and/or a prohibition for the board to take or implement decisions to the detriment of the shareholders and/or the ‘unwanted’ bidder. This may be well advised in case of conflicts of interest, e.g. because the bid is made by an existing major shareholder or because directors or supervisory directors will hold or acquire a financial interest in the bidder after completion of the bid. Provisional measures restricting the board to take or implement adverse decisions may also be sought through the District Court, which in principle will be competent regardless of the number of shares held by the applicant, whereas for applications with the Enterprise Chamber in most cases the applicants have to jointly hold at least 10% of the issued capital or, in case of a large cap company, 1% or a minimal value of € 20 Million based on the current stock price. Shareholders may also ask the financial supervisor AFM to refuse or revoke a required approval and/or to investigate possible breaches of the bidding process rules, market abuse regulations or reporting obligations by the NV and/or the bidder and/or related persons and to take enforcement action against them.
Squeeze-out of remaining shareholders
If the bidder completes the offer and gains control over the majority of shares, he will usually want to squeeze-out the remaining shareholders through a buy-out procedure (‘uitkoop procedure’), legal merger (‘juridische fusie’) or asset transfer (‘activa transactie’) on the basis of the bid price that he previously offered but that has been rejected by those shareholders.
Resisting a squeeze-out
When the bidder starts a buy-out procedure at the Enterprise Chamber, the remaining shareholders can file a statement of defense. For a legal merger or sale of all assets of the NV, AGM approval is required with an increased majority (legal merger) or common majority (asset transaction). If the bidder controls the AGM, he will be able to enforce such approval, but in doing so he must also take into account the legitimate interests of the minority shareholders. In practice, the remaining shareholders will usually try to enforce the appointment of independent experts who determine the actual share value. This may inter alia be required if relatively few shareholdrs have accepted the bid (so that the market percieves the bid price to be inadquate) and/or the share price prior to the bid does not reflect the actual share value, e.g. because of thin trading (market failure) or the share price is strongly influenced by a one-off event with temporary effects which are not likely to affect the NV’s long term results and/or by insider trading or transactions.
An NV facing financial problems may be required to take far-reaching measures to strengthen its financial position and safeguard its continuity. Such measures may include the issue of new shares (or claim rights), the sale of major subsidiairies or assets (often at discounted prices), the transfer of ownership rights to its banks or other creditors (e.g. by a debt for equity swap) and/or entering into new financing arrangements resulting in higher financing costs. It is obvious that such measures may have a very negative impact on company and share value. Dutch law protects the rights and interests of shareholders during such restructurering in various ways, the most import of which are described below.
Mandatory AGM approval
The AGM is empowered to decide on the issuance of new shares (or rights to take such shares), unless the AGM has previously authorized the board to do so in its place. In most cases such authorisation would in practice be limited to an issue of new shares not exceeding 10% of the already issued capital. In mosts cases a larger issue is required to restructure the NV so the AGM will be the competent authority. AGM approval is also required if the restructuring plan requires the NV to sell off subsidiaries with a value exceeding 25% of the balance sheet value of the NV. Finally, the NV’s articles may grant the AGM wider powers in case of a restructurering or major transactions.
Shareholders’ rights under the WHOA
A restructuring may result in a conversion of rights of creditors of the NV into new shares under a creditors’ arrangement. The new Dutch Homologation of Creditor Arrangements Act (‘Wet Homologatie Onderhands Akkoord’ or ‘WHOA’), which is fairly comparible to a reorganiszation under Chapter 11 of the US Bankruptcy Code, offers a legal basis for this. The WHOA grants creditors and shareholders alike the right to influence the restructuring process by requesting the District Court to appoint an independent expert to prepare such creditor arrangement (instead of the NV) and/or to determine the company and share value in connection thererwith. If the rights of shareholders will be altered or otherwise effected under such arrangement, e.g. because new shares are issued to creditors without AGM approval, shareholders should also have the right – as creditors do – to request the District Court to take further decisions relating to the restructuring process and to object to the creditor arrangement being declared binding (‘homologation’).
Other rights of shareholders during restructuring
Apart from an issue of new shares, sale of major subsidiaries or creditors’ arrangement, a restructuring may also consist of other measures such as taking out new loans, the issuance of bonds, the sale of smaller subsidiaries or assets and/or a change of the NV’s business strategy. Taking such measures usually lies within the competence of the management board, in some cases subject to approval by the supervisory board. However, shareholders may contest such decisions through the courts. Any shareholder may request the District Court to suspend (as a provisional measure) and to annul such decisions if they are contrarcy to Dutch law, the NV’s articles or the principles of reasoanbleness and fairness (‘redelijkheid en billijkheid’) that the board has to comply with in relation to the shareholders. Alternatively, provided they hold sufficient shares in the NV, shareholders may start enquiry proceedings before the Enterprise Chamber. This may include a request for provisional measures such as the appointment of one or more independent supervisory directors overseeing the restructuring and/or seek a prohibition for the board to take or implement decisions contrary to the interests of the NV or which would disproportionately harm the interests of the shareholders. This situation may arise, for example, when the restructuring would result in third parties gaining effective control over the NV without adequate compensation for the shareholders.
Shareholder activism is defined as any situation in which shareholders are trying to change or influence the strategy of the NV by actively using their rights as a shareholder. There are different types of activists, such as hedge funds, institutional investors and interest groups, and they often have different objectives.
Goals of shareholder activism
Most common are financial goals and ESG goals. Hedge funds often seek to increase the share value or share price in the shorter term by insisting on the sale of the company or parts thereof and/or by making additional distributions to shareholders through a super dividend or share buyback. Institutional investors such as pension funds and investor interest groups such as the VEB and Eumedion seek to improve governance, i.a. by insisting on the independence of supervisory or non-executive directors, alignment of directors’ remuneration with shareholder interests, proper (financial) reporting and external audits and countering unnecessary restrictions on the AGM’s powers such as the granting of additional voting rights to insiders or creating additional protective measures. Improving governance may indirectly increase share value.
This may in the long run also be true for some actions of public interest groups that focus on sustainability, environmental and social goals. Increasingly, financial regulators, institutional investors and specialist sustainable investor interest groups such as the VBDO are also pushing for this.
Legal instruments for activists
Activists will often first push for a change in strategy through non-legal means, for example through bilateral consultations or by sending public or non-public letters to the NV’s board of directors. To increase pressure, activists often also seek out the media and/or set up separate websites to support their campaign. In addition, they can express their discontent with current strategy by making use of their rights to attend, speak and vote at the AGM. This may start with a ‘just say no’ campaign, voting against the discharge and/or remuneration of directors, or – in graver cases – vote against the (re) appointment of directors and/or the adoption of the annual accounts. If implementation of parts of the current strategy is subject to AGM approval, e.g. for a major acquisition or sale of a subsidiary, shareholders may vote against this. If the board continues to refuse the proposed strategy change, or even to seriously consider it, activist shareholders may try to change the composition of the board by nominating their own candidates for appointment and/or propose the dismissal of incumbent directors. The board may defend itself temporarily against this by invoking a response time or cooling-off period or by using protectiove measures (as desribed below). Finally, shareholders can initiate proceedings against the NV at the competent District Court or the Enterprise Chamber. E.g. to seek an order to have shareholder proposals added to the AGM’s agenda, convene an extra ordinary AGM, a prohobition for the board to take or implement certain decisions and/or to appoint of one or more independent supervisory directors with a mandate to intervene in the conflict.
Legal limitations to activism
Courts have held that the NV’s strategy belongs to the exclusive competence of the board. Case law also suggests that shareholders can only add proposals or other items to the agenda of an AGM if such items relate to decisions which fall into the competence of the AGM (i.e. that such decision can only be taken by the AGM itself or requires the AGMs approval). This would not include strategy as such. However, shareholders can make proposals to appoint or dismiss managing or supervisory directors if such directors continue to oppose the proposed strategy change. The board may then defend itself by invoking a response time of up to 180 days in which the board does not have to put such proposals on the AGMs agenda and does not need to convene an AGM. This response time will soon be replaced by a statutory cooling-off period of up to 250 days during which the AGM cannot take decisions to appoint or dismiss managing or supervisory directors or to amend provisions in the articles in relation thereto. After the response time or cooling-off period has lapsed, the board may invoke further protective measures to prevent the AGM from taking the proposed decisions. E.g. grant control over the AGM to an independent foundation that continues to support the current board by issuing preferred shares to this foundation. If the proposed strategy change would threaten the continuity of the NV or seriously harm the interests of other stakeholders such as the employees, the board may consider to take such further measures. However, also then the board will be obliged to consult its shareholders and other stakeholders, to examine alternative strategies and to publish a report on this.
Success of shareholder activism
Despite the limitations set out above, using legal instruments may in practice significantly contribute to the success of an activist campaign. Using legal instruments will force the NV’s board to consult with the activist and other major shareholders, to seriously consider the proposed strategy changes, to respond to this publicly and in a motivated manner and to consider and formulate alternatives to the current and proposed strategy. Also, legal pressure can be a means to acquire support from other shareholders and/or public opinion, which may further contribute to a realization of the activists objectives.
Claims for damages
Shareholders may be entitled to compensation of damages in connection with a drop in share price or value due to an unlawful act or negligence on the part of the NV or its directors. Dutch law provides a special procedure for collective redress, called a collective action. Such a collective action can be brought by an association or foundation representing the injured investors. This Dutch collective action is in many aspects fairly similar to the US style class actioin (see more information on the page Investor Class Actions). Shareholders who wish to retain more control over their claim may decide to start own proceedings (alone or with others) or to join individual or collective proceedings of others as independant claimants.
Liability of the NV for deception (‘misleiding’)
The most common ground for liability of the NV toward its shareholders is deception (‘misleiding’). Examples include statements made in an IPO prospectus or other offering documents, in the annual report or accounts or other financial reports which are to be deemed misleading (because they give a materially incorrect or imcomplete picture of the NV’s strategy, risk profile or financial position, results or prospects) as well as a failure to timely diclose price sensitive information, e.g. by not responding to take-over rumors that already affect the share price or to timely correct previously published but now outdated financial forecasts.
Personal liability of the directors for misleading statements
When the annual accounts are deemed to be misleading, the managing and supvervisory directers may also be personally liable for damages suffered by investors as a result thereof. The personal liabilibity of the managing directors may also extend to the annual report as a whole and other financial reportings of the NV.
Personal liability of directors for mismanagement
The managing and/or supervisory directors may also be liable for mismanagement (‘onbehoorlijke taakvervulling’). Examples of mismanagement include not having proper risk control mechanisms, engaging in major acquisitions or investments without proper due diligence, reckless borrowing, lending substantial amounts without proper credit research or adequate security or allowing insider transactions between the NV and its directors, majors shareholders or affiliated persons to the detriment of the former. Mismanagement inflicts damage primarily on the NV itself, damages suffered by the shareholders by a drop in share value or price are considered an indirect consequence thereof (‘afgeleide schade’). It is therefore up to the NV, or in case of bankruptcy its liquidator, to recover such damages from the directors. Direct claims made by shareholders on this ground are only rarely awarded. Mismanagement is in many cases demonstrated by a judgement of the Enterprise Chamber as a result of prior enquiry proceedings.
Liability of a lead manager and/or the NV’s auditors
In some cases, auxiliary persons of the NV may also be liable for damages suffered by shareholders as a result of deception by the NV. This may include the bank acting as a lead manager in an IPO or futher issue of the NV’s shares which is in such capacity co-responsible for the prospectus and other documents and information provided to the public in connection with the offering. This may also include the NV’s external auditors who have approved financial statements that later prove to be misleading to the public. Such bank or auditor may be liable if he failed to exercise due care in drafing or checking the documents and statemetns at hand in accordance with the professional standards applicable to him.